Captives and Medical Benefits Medical Stop Loss in the U.S. Debbie Liebeskind, FSA, MAAA, CLU, ChFC Towers Watson 1
Discussion Outline General background on stop loss insurance Medical reinsurance transaction 2
General Background on Stop Loss Insurance 3
Introduction Over a $5 billion stop loss market in the U.S. Provides protection to self-insured employers who want to mitigate claim risk due to large or unanticipated claims fluctuation Generally two types of stop loss insurance available: Specific stop loss Protection against large individual claims during a year Most common Aggregate stop loss Protection against the sum of all claims in a year Not as common with medium-sized to larger employers 4
Why purchase stop loss? Large claims are unpredictable Health Care Reform eliminates coverage limits, which may change the risk management tolerance of some employers The cost trend for large claims continues to rise faster than overall medical trend. Stop loss rate increases average at least 15%-20% Intensity of services being delivered Increasing use of high cost drugs Ability to prolong life and save premature infants earlier New and expensive technologies Leveraging impact of high stop loss deductibles 45 40 35 30 25 20 15 10 5 0 42.0 39.0 35.7 29.6 13.0 13.0 10.8 8.8 4.4 5.0 5.0 3.4 1.2 1.5 2.0 2.0 2008 2009 2010 2011 $300,000 $500,000 $700,000 $1,000,000 Source: Thompson Reuters - MarketScan Number of claims per 100,000 participants 5
Factors to consider when buying stop loss coverage Risk management philosophy There is no one answer or algorithm to determine whether to buy stop loss and how much. Risk management philosophy and cash flow are the primary determinants of whether to purchase stop loss and how much protection. Companies with conservative philosophies purchase more insurance and those companies willing to accept more risk purchase less insurance or don t purchase insurance at all. Towers Watson can help you think through the elements you should consider. Spread of Risk Generally, smaller employers have a greater need for protection due to a higher risk of claim fluctuation. Larger employers have a lesser need since the size of the group enables a greater spread of risk. Very large employers often absorb all the risk and eliminate stop loss insurance completely. Much of the decision goes back to risk tolerance. Towers Watson can help organizations understand the risk volatility at various size levels. 6
U.S. Medical Stop Loss Deductible Benchmarking 2013 (Prevalence data compiled by collecting book of business information from the partner vendors in the Towers Watson Stop Loss Purchasing Program) 7
U.S. Medical Stop Loss Deductible Benchmarking 2014 (Prevalence data compiled by collecting book of business information from the partner vendors in the Towers Watson Stop Loss Purchasing Program) 8
What are the different contract bases and what is the most appropriate contract basis for my program? Following are the most common bases listed in order from more comprehensive coverage to less comprehensive coverage. Basis Description Incurred Period Covered Example 1 Paid Period Covered Example 1 Claims Not Covered Example 1 Paid Covers all claims in a year, regardless of when the claim is incurred. Generally available on renewal but not year 1 of a contract. Any date 12 months 1/1/14 to 12/31/14 None; all claims covered. 2 24/12 Covers all claims paid in a year that are incurred during the 24-month period beginning 12 months before the year begins. 24 months 1/1/13 to 12/31/14 12 months 1/1/14 to 12/31/14 Incurred prior to 1/1/13. 2 18/12 Covers all claims paid in a year that are incurred during the 18-month period beginning 6 months before the year begins. 18 months 7/1/13 to 12/31/14 12 months 1/1/14 to 12/31/14 Incurred prior to 7/1/13. 2 15/12 Covers all claims paid in a year that are incurred during the 15-month period beginning 3 months before the year begins. 15 months 10/1/13 to 12/31/14 12 months 1/1/14 to 12/31/14 Incurred prior to 10/1/13. 2 1 Example assumes a 2014 contract year. 2 Technically, claims paid after 12/31/2014 are not covered unless the contract renews, which is generally the case. 9
Why not just go to my medical carrier for stop loss insurance? Medical Carrier Advantages Ease of administration for claims and premium billing. No stop loss coordination charges, which occur with an outside Direct Writer (roughly $0.50 PEPM). Disadvantages Not always the lowest cost. Generally, medical carriers cannot include coverage for carve-out PBMs. Need for multiple contracts if there are multiple medical carriers. Direct Writer Lower premium rates. Coverage for Rx drugs if there is a carve-out vendor. Another vendor to manage. If you want to go with a direct writer, Towers Watson s Stop Loss Purchasing Program may be of value to you 10
Medical Reinsurance Transaction 11
Reinsurance basics The medical reinsurance marketplace is even larger than the stop loss marketplace Thus, it is generally more competitive than the Stop Loss marketplace For one recent client, reinsurance would save 51% over medical vendor stop loss Towers Watson s Stop Loss Purchasing Program would save 34% over medical vendor stop loss It also tends to use slightly lower medical trend upon pricing renewals We are typically seeing 8-10% trend on reinsurance vs. 15-20% on stop loss But reinsurance can only be purchased by an insurance company Aha, a captive is an insurance company and can purchase reinsurance 12
Pros and cons of captive reinsurance over stop loss Pros Most economic value add solution Even lower future cost due to lower reinsurance trend vs. stop loss trend There may be an opportunity for P&C tax benefits by having SL as 3rd party risk in the captive Would be in a position to easily move to a model where the captive takes a slice of the risk Provides potentially uncorrelated risk to the captive May be possible to use group risk bearing capacity when one or more subsidiaries purchase commercial stop loss to transfer their risk Too great for the subsidiaries to bear but well within the risk bearing capacity at the group level Cons Additional captive accounting needed Additional agreements needed Need to be certain that no employee contributions are used for stop loss To preclude need for DOL prohibited transaction exemption approval The captive would have to file and issue a stop loss policy to the plan sponsor Solvency requirements may increase and would need to be evaluated if the captive takes a slice of the risk There may be a small premium tax, depending upon state where captive is domiciled Direct placement insurance premium tax might be applicable, depending upon the laws of the states where employees are located 13
Sample premium flow chart for U.S. medical stop loss Reinsurer Captive Annual Premium January year 1 Plan Sponsor within 30 days after reports received Annual Premium Charge Back January year 1 Plan Sponsor Subsidiaries/Divisions Self-Funded Medical Vendor A B C 14 14
Action Steps Collect claim data and do feasibility analysis to determine whether or not to proceed with captive reinsurance Finalize plans and financial arrangements with self-funded medical vendors If captive reinsurance is desired, kick off reinsurance procurement process by September of 2015 Review plans and objectives Create the RFP Market the program and obtain quotes Review results of marketing (quotes, contract terms, limitations) Negotiate final terms and place contract 15